Question

Mohave Corp. makes several varieties of beach umbrellas and accessories. It has been approached by a company called Lost Mine Industries about producing a special order for a custom umbrella called the Ultimate Shade (US). The special-order umbrellas with the Lost Mine Company logo would be distributed to participants at an upcoming convention sponsored by Lost Mine.

Lost Mine has offered to buy 2,300 of the US umbrellas at a price of $19 each. Mohave currently has the excess capacity necessary to accept the offer. The following information is related to the production of the US umbrella:   

Direct materials	$	9.00
Direct labor		4.00
Variable manufacturing overhead		5.00
Fixed manufacturing overhead		2.50
Total cost	$	20.50
Regular sales price	$	27.00

Required:
1. Compute the incremental profit (or loss) from accepting the special order.

Profit (or loss)

by

2. Should Mohave accept the special order?

	Yes
	No

3. Suppose that the special order had been to purchase 2,800 umbrellas for $16.00 each. Recompute the incremental profit (or loss) from accepting the special order under this scenario.

Profit (or loss)

by

4. Assume that Mohave is operating at full capacity. Calculate the special-order price per unit at which Mohave would be indifferent between accepting or rejecting the special order.

Special Order Price

per unit

Answer 1

	Per unit	Total 2300
Incremental revenue	19	43700
Variable costs:
Direct materials	9	20700
Direct labor	4	9200
Variable manufacturing overhead	5	11500
Total Incremental costs		41400
Incremental net operating income(loss)		2300
Profit increases by $2300
2
Yes
3
	Per unit	Total 2800
Incremental revenue	16	44800
Variable costs:
Direct materials	9	25200
Direct labor	4	11200
Variable manufacturing overhead	5	14000
Total Incremental costs		50400
Incremental net operating income(loss)		-5600
Profit decreases by $5600
4
Special Order Price $27 per unit